US warns Iran against closing key oil route

Thursday

Dec 29, 2011 at 6:00 AMDec 29, 2011 at 11:23 AM

By Ali Akbar Dareini and Tarek El-Tablawy THE ASSOCIATED PRESS

The U.S. strongly warned Iran on Wednesday against closing a vital Persian Gulf waterway that carries one-sixth of the world’s oil supply, after Iran threatened to choke off traffic through the Strait of Hormuz if Washington imposes sanctions targeting the country’s crude exports.

The increasingly heated exchange raises new tensions in a standoff that has the potential to spark military reprisals and spike oil prices to levels that could batter an already fragile global economy.

Iran’s navy chief said Wednesday that it would be “very easy” for his country’s forces to close the strategic Strait of Hormuz, the passage at the mouth of the Persian Gulf through which about 15 million barrels of oil pass daily. It was the second such warning by Iran in two days, reflecting Tehran’s concern that the West is about to impose new sanctions that could hit the country’s biggest source of revenue, oil.

“Iran has comprehensive control over the strategic waterway,” Adm. Habibollah Sayyari told state-run Press TV, as the country was in the midst of a 10-day military drill near the strategic waterway.

The comments drew a quick response from the U.S.

“This is not just an important issue for security and stability in the region, but an economic lifeline for countries in the Gulf, to include Iran,” Pentagon press secretary George Little said. “Interference with the transit or passage of vessels through the Strait of Hormuz will not be tolerated.”

Rebarich declined to say whether the U.S. force had adjusted its presence or readiness in the Gulf in response to Iran’s comments, but said the Navy “maintains a robust presence in the region to deter or counter destabilizing activities, while safeguarding the region’s vital links to the international community.”

Iran’s threats to seal off the Gulf, surrounded by oil-rich Gulf states, reflect its concerns over the prospect that the Obama administration will impose sanctions over its nuclear program that would severely hit its biggest revenue source. Iran is the world’s fourth-largest oil producer, pumping about 4 million barrels a day.

Gulf Arab nations appeared ready to at least ease market tensions. A senior Saudi Arabian oil official told The Associated Press that Gulf Arab nations are ready to step in to offset any potential loss of exports from Iran. The official spoke on condition of anonymity because he was not authorized to comment on the issue.

Saudi Arabia, which has been producing about 10 million barrels per day, has an overall production capacity of over 12 million barrels per day and is widely seen as the only OPEC member with sufficient spare capacity to offset major shortages.

What remains unclear is what routes the Gulf nations could take to move the oil to markets if Iran goes through with its threat.

About 15 million barrels per day pass through the Hormuz Strait, according to the U.S. Energy Information Administration.

There are some pipelines that could be tapped, but Gulf oil leaders, who met in Cairo on Dec. 24, declined to say whether they had discussed alternate routes or what they may be.

The Saudi official’s comment, however, appeared to allay some concerns. The U.S. benchmark crude futures contract fell $1.98 by the close of trading Wednesday on the New York Mercantile Exchange, but still hovered just below $100 per barrel.

U.S. State Department spokesman Mark Toner played down the Iranian threats as “rhetoric,” saying, “we’ve seen these kinds of comments before.”

While the Obama administration has warned Iran that it would not tolerate attempts to disrupt traffic through the Strait of Hormuz, U.S. officials do not see any indication that the situation will come to that. Nor do they believe that Iran, which is already under increasing pressure from sanctions, would risk disrupting the Strait because doing so would further damage Iran’s own economy.

Instead, the administration believes Iran is playing the only card it has left: issuing threats and attempting to shift focus away from its own behavior.

U.S. officials have not said whether there is a concrete response plan in place should Iran seek to block the strait. But the administration has long said it is comfortable with the U.S. Naval presence in the region, indicating that the U.S. could respond rapidly if needed.

The White House has been largely silent on Iran’s threat, underscoring the administration’s belief that responding at the White House level would only encourage Iran.

While many analysts believe that Iran’s warnings are little more than posturing, they still highlight both the delicate nature of the oil market, which moves as much on rhetoric as supply and demand fundamentals.

Iran relies on crude sales for about 80 percent of its public revenues, and sanctions or even a pre-emptive measure by Tehran to withhold its crude from the market would batter its already flailing economy.

IHS Global Insight analyst Richard Cochrane said in a report Wednesday that markets are “jittery over the possibility” of Iran’s blockading the strait. But “such action would also damage Iran’s economy, and risk retaliation from the U.S. and allies that could further escalate instability in the region.”

“Accordingly, it is not likely to be a decision that the Iranian leadership will take lightly,” he said.

Earlier sanctions targeting the oil and financial sector added new pressures to the country’s already struggling economy. Government cuts in subsidies on key goods like food and energy have angered Iranians, stoking inflation while the country’s currency steadily depreciates.

The impetus behind the subsidies cut plan, pushed through parliament by Iranian President Mahmoud Ahmadinejad, was to reduce budget costs and would pass money directly to the poor. But critics have pointed to it as another in a series of bad policy moves by the hardline president.

So far, Western nations have been unable to agree on sanctions targeting oil exports, even as they argue that Iran is trying to develop a nuclear weapon.